The foundation of a family business is a strong marriage.
Family business succession planning should be a priority for every firm that wants to pass on its business to the next generation.
Global enterprises such as Volkswagen, Walmart, Alma and Bidco have gone through several family generations.
Nothing succeeds like success, the saying goes. But for family businesses, it is smart succession planning that can be the key to sustaining the company in the future and keeping it flourishing. Problem is: few family business owners are doing a good job preparing to turn their enterprises over to the next generation.
Generally, most family business founders find themselves so involved in day-to-day operations. Sooner or later, everyone wants to retire. But if you own a family business, retirement isn’t just a matter of deciding not to go to the office any more.
Besides ensuring that you have enough money in retirement, the whole question of what happens to the business becomes paramount. Who’s going to manage the business? How will ownership be transferred?
If relatives will take over the business, then it is important to have a succession plan in place to manage these issues for a smooth transition between you and the future owners of the business. Succession planning can be complicated for family businesses because of the relationships and emotions involved. And because most people are not comfortable discussing ageing, death and financial affairs, among others.
Perhaps this is why more than 80 percent of family-owned businesses do not survive the transition from founder to the second generation. In most cases, the killer is taxes or family discord, both issues that good family business succession planning will cover.
THE THINGS THAT MAKE THESE FOUNDERS SUCCESSFUL
Vision, communication and execution need some coaching to apply the skills in the family’s strategic plan and vision.
Without proper succession planning, the business and the family can end with disagreements and legal tangles — sometimes played out in the local media.
The worst-case scenario is the future owners become embroiled in a conflict that escalates publicly, with the only winners from fighting are lawyers and taxman.
Start succession planning early if you are a family business founder expecting that one or more of your children will take over the venture at some point.
The earlier you can start planning for that transition, the better.
The founder takes 10 years to plan for succession, working through estate planning, taxes, liability, ownership stakes and voting rights.
Long-term succession planning can give your child or children time to learn the management tasks and for you to see how well they’re executed.
Set up a board of advisers with non-voting shares who will observe how you run the business. Mentor your child or children and bring them along to see if they can measure up.
Which child or children will take over? The most important thing to work through, of course, is determining which child or children will run the business and when that will happen.
Such decisions can be emotional for families. It has implications for the business itself financially and impacts the legacy of not only what you want it to look like over the long-term but also how it intersects with your family and the community.
Some owners mistakenly assume a specific child can take over the business when the reality is the son or daughter lacks the appropriate experience and expertise, which can be a disaster.
The majority of the younger generation these days are not interested in the family business, let alone ultimately running it.
Working with a family business adviser makes the succession smooth.
The advisers help with strategic positioning and shine a light down the road. They objectively discuss with you the pros and cons of handing over the reins to your children versus bringing in an outsider to run the company.
They also work with you to prepare necessary succession documents.
GOVERNANCE STRUCTURE
Well-governed family firms over time outperform non-family businesses. However, the majority of family business owners have no clue that there are well-established governance processes to help prepare for succession or how to find them.
Preparing charter ownership and a constitution helps.
As a founder, let the next generation run the show and make some mistakes to learn from them and do things differently.
CHANGE THE BUSINESS STRUCTURE
The assets of a sole proprietorship or partnership are indistinguishable from the personal properties of the owner and as such the business cannot be willed or passed on.
Only the assets of the business can be transferred. If you have a sole proprietorship or partnership and wish to have one or more successors continue the business, the best option is to form a corporation that can continue to operate after it is sold or upon the death of the owner.
MANAGEMENT, OWNERSHIP, AND TAXES
It’s important to realise that management and ownership are not necessarily the same. You may decide, for instance, to transfer management of your business to one of your children but transfer equal shares of business ownership to all your children, whether they’re actively involved in operating the enterprise or not.
The taxes component of succession planning looks at the minimisation of taxes upon death.
There are asset transfer tax strategies that help you do this such as freezing the value of your interest in the company while you transfer ownership to your children.
In my next series shall write on resolving disputes in a family business.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
